“Nobody can do it”: Small retailers say they can’t make high Sydney rents work, as landlords show no mercy

Inside Bambino Manly, which relocated from a retail site at Freshwater after facing high rents.

Independent retailers and small business experts say smaller operators have their backs to the wall when it comes to Sydney’s high commercial rents, with multiple businesses claiming they have been forced to relocate or shut up shop because of demands of landlords.

On Friday, Jacqueline Major, the owner of Sydney retailer Oz Resort told SmartCompany she was forced to relocate her business from Mosman to a warehouse in Balgowlah after 30 years because of a rent bill of upwards of $130,000 a year.

The store’s revenue was sitting just on $1 million a year and when Major spoke to her landlord about the significant pressure being put on the business, she says she was told, “you’re the only one with a problem”.

In response to Major’s story, several other business owners have spoken out about the commercial leases in Australia. They say increasing rental costs have also forced them to reevaluate the viability of their businesses.

“After an unbroken record of 40 years as a retailer and services business I closed my shop in Neutral Bay,” one business owner commented last week.

Susan Steel, founder of toy shop Bambino Manly, says her experience shows landlords do not care about the diversity of strip shopping in Australia.

Her company, formerly known as Wonders Toys, moved from Freshwater to Manly and changed its name after a redevelopment of the shopping strip it had been in for six years forced its hand.

Steel says she was supportive of the plans to redevelop the shopping village where her store was located, even though it meant she would have to move from her rental premises and find a new location close by.

There is a strip of four shops directly across the road from her store’s original location that had been empty for some time, but Steel says when she approached the landlords to apply for a tenancy, she was quoted weekly rents that would have been unsustainable given her company’s turnover.

“There were empty shops across the road, going across there would have made absolute sense. But they were asking upwards of $130,000 a year. I couldn’t do it, but then, nobody can do it,” she tells SmartCompany.

“If it was a case that it was just the rental market, and I can’t afford it and it’s my bad, that’s one thing. But these shops have been empty for years.”

Looking for alternatives, Steel discovered rents in the well-known Corso Manly strip were on par with what she had been offered in Freshwater.

She decided to look just outside this main strip in Manly, and found an option that was more reasonable.

“This one [the new Manly tenancy] is sitting at about 25 to 30% of revenue, which is still high — but elsewhere, it was starting to look like you’d have to pay 50 to 60% of revenue,” Steel says.

She believes the current situation in Sydney is unsustainable for independent retailers.

“No small business wants a discount, I want to compete and I want to make it work,” she says.

However, in the current environment, Steel believes no business can stand the heat of the demands being made by landlords, which increasingly means it will only be large international retailers that can afford to be in local community shopping strips.

“I think it definitely turns them all into cookie cutter villages,” Steel says.

Rental price increases could be here to stay, according to commercial real estate analysts.

A Colliers International report into the retail leasing sector revealed that in the second half of 2017, average gross rents in Sydney’s CBD have increased 25.5% over the past year.

On average, one square metre of rental space will cost $12,253 per annum.

While consumer sentiment has been shaky over the past year, Colliers’ analysts highlight the current commercial leasing market is being powered by more than one million square metres of outstanding demand for Australian shopfronts.

This demand is coming from both local retailers and international entrants, with supermarkets accounting for 36% and “mini major” retailers accounting for 18%. It’s far outstripping what’s on offer, according to the report, with a majority of companies seeking new tenancies looking for sites “within super prime assets along the eastern seaboard where retail drivers are most favourable”.

Small businesses must watch contract terms closely

It’s not just Sydney small businesses feeling the pressure of increasing rents; Australian Small Business and Family Enterprise Ombudsman (ASBFEO) Kate Carnell says SMEs across the country are facing some of the highest retail rents in the world.

“This is both in major shopping centres and in neighborhood centres, and they have gone up at a significantly higher rate than CPI,” she says.

She points to Productivity Commission data, which since 2014 has shown occupancy cost ratios in Australia have outstripped the US, United Kingdom and European markets.

“This is a really big problem, and there are a range of clauses we’ve seen in tenancy agreements that we believe wouldn’t cut the mustard in unfair contracts,” Carnell says.

She urges small businesses who have questions about their rental agreements to contact their state’s small business commissioner, or the ASBFEO office, before they sign any agreements.

“It is really hard to change things once you sign it [a lease agreement], unless the terms are unfair. But even then, they only way to change those terms is by you taking legal action,” she says.

State small business commissioners have also highlighted rental disputes as a key area of interest, with several of the state-based offices able to offer advice or services for small businesses to have an independent valuer review a property in the event a landlord and tenant disagree on the appropriate level for rent.

In 2017, the Victorian Small Business Commissioner reported that retail lease disputes accounted for 53% of the total number of disputes brought to the office by small businesses.

More than 400 disputes about retail leases went to mediation though the Commissioner’s office last year, with 74% of these resolved successfully.

Carnell says small businesses should be diligent in researching all terms of a leasing agreement before signing it, as some contracts make significant demands on businesses to pay for updates such as new shop fit outs in the event of a relocation or redevelopment.

“If they have the capacity to move you at will or every few years, a shop fit out can easily be up to half a million dollars,” she says.

Amanda Falahey, director of commercial property consultancy Eve Property, says the current market is making it incredibly tough for small businesses to get a good deal.

“What we’ve seen with small businesses who have contacted us is that their rent has gone up over a time, and it has escalated dramatically, to a point where their business is really not viable,” she says.

In the current climate, Falahey says it’s critical that smaller operators do detailed research by reviewing both the rental market in their areas and talking to other tenants close by if possible.

“I think when most people sign they look at the rent and just think, ‘will that work for me now?’ But it’s important to research the market and understand where the trends are going,” she says.

Collecting as much intel from tenant representatives, lawyers or fellow business owners as possible will give your business a good amount of bargaining power when it comes to negotiating, Falahey says.

“You don’t need to agree to everything the landlord proposes,” she says.

SmartCompany is the leading online publication in Australia for free news, information and resources catering to Australia's entrepreneurs, small and medium business owners and business managers.

Monday to Friday, SmartCompany.com.au publishes news, business trends and ideas from around the world, profiles and features, as well as all the latest business, tax, legal, marketing, politics and innovation developments occurring around the country.